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Burrill CEO Discusses Pharma’s Evolving Role, Projects Generic Saturation in Dx Market

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SAN FRANCISCO – As the healthcare infrastructure moves away from a one-size-fits-all model to a more personalized paradigm, and pharmacogenomic technologies shift the economic focus from the development of blockbusters to niche-busters, large drug companies’ sales prowess will be what saves them, according to Burrill & Company CEO Steven Burrill.
 
And like the pharma industry, the diagnostics industry is expected to enter a profitable period in the next few years in which the value and demand of genetic tests will rapidly rise, Burrill noted. Eventually, however, the diagnostics market might mirror the pharmaceutical market with the entrance of low-cost “generic” products that cut into the market for branded products.
 
In the age of personalized medicine, “business models will have to change dramatically,” Burrill said at a personalized medicine conference held earlier this month by his namesake San Francisco-based life sciences merchant bank. “The big pharma model is in the process of disintegrating, disaggregating” in the face of dwindling innovation, lost patent exclusivity, and generic competition.
 
This year is projected to be one of the leanest in terms of new molecular entities approved by the US Food and Drug Administration. Between Jan. 1 and Oct. 31, the FDA approved just 15 NMEs. At this rate, the agency stands to fall below the 22 NMEs is approved in 2006, the 20 it green-lighted in 2005, or the 36 it cleared in 2004.
 
And last year, $23 billion worth of brand name drugs went off patent worldwide while this year, an additional $16 billion worth of drugs are expected to lose their exclusivity, according to IMS Health.
 
Given this scenario, Burrill projected that big pharma's new role in the era of personalized medicine will be that of “mega-distributor.” In turn, the bulk of innovation will come from smaller biotechs.
 
“It isn’t discovery; we do discovery outside now,” said Burrill. “It isn’t development; Quintiles, PPG, Parexel, they’re already doing all the clinical development. It isn’t manufacturing; we do manufacturing cheaper in China, India and in Eastern Europe,” he added.
 
“You look at the big pharma model and say, ‘What’s left?’ The only thing that’s left is distribution,” he said. “So the big pharma companies are going to be the Wal-Marts of the world. They’re going to be big distributors around diseases. … Everything else below distribution they’re going to outsource.”
 
Given this outlook, it may be that small diagnostics shops – providing large drug companies with genomics services to help run more efficient and cheaper clinical trials – will increasingly turn to big pharma when it comes to marketing their diagnostics linked to drug response.
 
Companies like Perlegen, Clinical Data, and Monogram conduct genetic testing for pharma companies for clinical trials for drugs in their pipeline. And for these comparatively smaller shops with genomic and diagnostic expertise, the initial interaction providing genomics services to pharma can ultimately evolve in to a partnership that allows Dx shops to license certain biomarkers for internal development, or to develop a diagnostic that the pharma company eventually will market alongside a drug.
 
Pfizer, for instance, has a non-exclusive deal with Monogram to commercialize Monogram’s Trofile assay worldwide alongside its HIV tropism drug, Selzentry. Pfizer used the Trofile assay to gauge patients’ tropism status in clinical trials. In the process, Pfizer realized that Monogram’s assay was critical to the sales of the HIV drug.
 
This relationship gave Pfizer access to a technology that helped characterize the prescribing population for a new drug, and offered Monogram access to Pfizer’s massive marketing and reimbursement muscle.
 
“Big pharma has concluded they can buy technology on Wall Street cheaper than they can invent it,” Burrill said. “[The] Pfizers of the world are going to take their $7 billion R&D budget and they’re going to buy their way out of problems by buying innovation from all of us.”
 
Smaller life sciences companies like Perlegen and Clinical Data, having research deals to conduct genomics studies for big pharma partners, can use those relationships to develop their own products.
 
According to Clinical Data CEO Drew Fromkin, by working with pharma, Clinical Data has gained the experience to now develop its own antidepressant drug vilazodone. The company recently announced that the investigational drug met its primary and secondary endpoints in a pivotal Phase III study and may even have a companion diagnostic associated with it [see related story, this issue and PGx Reporter 09-05-2007].
 

“The big pharma model is in the process of disintegrating, disaggregating.”

And Perlegen has said that it is conducting research that might possibly lead to a genetic test to identify patients at risk of experiencing heart failure after taking GlaxoSmithKline’s popular type 2 diabetic drug Avandia [see PGx Reporter 07-11-2007].
 
Although Perlegen has genetic research collaborations with several large pharma and biotech companies, including Genentech, Pfizer, Merck, and GSK, the company said it is pursuing the Avandia diagnostic alone after licensing its own Phase III-ready TZD from Mitsubishi Pharma.
 
Burrill said these kinds of movements in the industry signal “a massive shift in the economics of the business,” in which “historically high-value, high-margin products are in the process of becoming the generic products of today. And the diagnostics products that have historically been low margin, low value, are moving up to the high-margin, high-value base.”
 
He pointed out that Genomic Health’s success with OncotypeDx might signal the beginning of this shift for the healthcare industry. Genomic Health demands $3,200 for OncotypeDX, and has deals with several insurers to get the test covered.
 
Boom to Bust
 
However, the trajectory for the diagnostics industry can also go the way of the pharma industry, from a boom period during which drug makers can charge premium prices for novel products to leaner times when generics cut into market share.
 
“The question is, how long do we sustain the profitability on the Dx side?” Burrill said. Referencing Genomic Health’s success with OncotypeDx, Burrill suggested that there may come a time when diagnostics shops may not be able to demand such premium pricing for innovative products.
 
“If I can do a similar diagnostic, with a little different algorithm, a little different technology, maybe I don’t sell it for $3,200. Maybe I sell it for $1,000 or $500,” he said.
 
The markets that will likely see the first of these less expensive, “generic” diagnostics will be in disease areas that are already crowded with genetic tests. One of these markets is for warfarin sensitivity testing.
 
Since the FDA updated the anti-coagulant’s label with genetic testing information, the segment has been heating up. There is an FDA-approved test for the indication, as well as homebrew tests, and several companies have expressed their intention to submit their tests for FDA approval.
 
Currently, with spotty reimbursement, a warfarin test costs between $300 and $500. However, as insurers come around, doctors and patients begin to be familiar with the genetic testing options, and competition increases, this price will likely fall.
 
“If you look at the new generation of diagnostics coming into the marketplace, they’re selling against the value they’re bringing into the market,” Burrill said. But “pretty soon, when there are other tests in that marketplace” the cost of those tests will go down.
 

“In the short run enormous value will be created on the Dx side,” he said. “In the long run, we may see kind of the branded generics in our world coming too, and we’ll have to struggle to sustain ourselves.”

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